You Didn't Vote For This
How Irish households subsidize German households during inflationary times
If you have a mortgage in Ireland, it means that you either:
(1) Are incredibly (un)lucky that you have been able to buy one of the few, overpriced houses on the island, and (2) that your Irish mortgage is probably a “tracker mortgage”, in which case you already know what I’m about to write in your bones.
Between 2022 and 2023, the ECB raised interest rates by 4.5 % :
An Irish household on a tracker mortgage saw their monthly repayment rise by over €600.
A German household on a fixed-rate mortgage paid around €35 more.
Same central bank but radically different outcomes to households.
Most commentary on this framed it as an Irish problem; insert something about mortgage culture, boom-era recklessness, the failure to fix themselves. But that framing is wrong, because this is not just an Irish issue!
Last year, I did a deep dive into the Irish Central Bank’s institutional architecture, in terms of how it’s structured, what it can and can’t do, and where the real constraints on Irish monetary policy actually sit. What came out of that work was a much bigger question:
Why do some EU households absorb ECB rate decisions immediately, while others barely feel them at all?
The answer is structural, and incredibly important (even if a little boring).
Consider that Irish tracker mortgages transmit ECB rate decisions almost perfectly, meaning that Irish people feel the impact of interest rate changes with near-zero lag.
German fixed-rate mortgages, on the other hand, are sitting on some sort of bond infrastructure that dates to Prussian land finance law of 1769 (I know), which insulate households almost entirely.
So, while neither Germany nor Ireland chose this, both inherited the systems that are either very lucky, or very unlucky, depending on where you live.
And the unlucky part? It’s because, if you’re in Ireland, you’re actually redistributive. Meaning that Irish households pick up the cost of inflation such that other countries, like Germany, don’t have to.
In other words: Irish and Spanish households doing more demand-destruction work per basis point is part of what allows the ECB to stop raising rates sooner.
Indeed. German households get the benefit of lower inflation and a stable currency without their mortgage bills having moved! While the ECB’s work was done disproportionately by households in Dublin and Madrid. So while the reward of fighting inflation is shared across the EU, the cost is not.
This structural subsidy (from high-transmission to low-transmission economies) cannot be resolved by market forces, or by anything the Central Bank of Ireland has the power to do.
This paper explains why, and what it would take to fix it.
The frameworks applied here, of architecture lag, premature markets, coordination architectures, are developed formally in two companion papers by Sinéad O’Sullivan. Available on request: s@sinead.co